Indonesia Will Raise Fuel Prices Despite Protests

Indonesia's information minister says the government will raise fuel prices before the end of this month. But it hopes to avoid major protests with a massive welfare program targeting the poor. Marianne Kearney from Jakarta has more.

With global oil prices hitting new records every week the Indonesian government says it has to raise subsidized fuel prices by up to 30 percent.

Information minister Muhammad Nur says the hike will go into effect after May 23, despite protests from student groups, and legislators. But he refused to specify how much the government will raise the fuel prices.

The planned hike has sparked protests across the country. Hundreds of students clashed with police in Makassar, South Sulawesi, as well as in the central Javan city of Semarang and Jakarta. The protesters say an increase in fuel prices will trigger further inflation, making life more difficult for Indonesia's poor.

A senior economist with Standard Chartered Bank, Fauzi Ichsan, says with fuel subsidies costing the government more than $14 billion this year, the government had no choice but to take this unpopular step.

"With such a big gap between domestic fuel prices, and global oil prices, the government spending on energy subsidies is bloating beyond the caps," Ichsan said.

Indonesia has some of the lowest fuel prices in Asia.

But Ichsan points out that much of the budget spent on maintaining low fuel costs, benefits wealthy car owners or people who smuggle fuel to Singapore and Malaysia.

"And of course if the gap becomes too big you will also trigger smuggling and hoarding, and hence the government subsidies will be enjoyed not only by middle class, who enjoy about 70 percent of the subsidies, but also by smugglers and hoarders," Ichsan said.

Reducing fuel subsidies is a politically risky move in Indonesia. In 1998, a dramatic rise in fuel prices caused skyrocketing food prices, and sparked widespread protests, helping to topple former president Suharto.

But the government argues the money saved from the oil subsidies will fund one of the world's largest welfare programs. Under this program, the government will give monthly cash handouts to 19 million families or approximately 76.4 million poor people.

Ichsan says that the government's cash handout will help reduce effects of inflation for Indonesia's poor.

"I think it may not offset the misery completely, but certainly it will help, it will help minimize public unrest," Ichsan said.

He says that when the government raised fuel prices by as much as 126 percent, three years ago, it was the same cash transfer program that ensured that were no riots across Indonesia.